SUN may be set to rise

While my personal and company trading decisions are based 100% on the SPA3 mechanical trading strategy and its researched technical criteria, there are many other well respected forms of technical analysis that one can use to analyse trends in different time frames.

I wrote this piece for Peter Switzer’s ‘Switzer Super Report’ earlier this month with a longer term horizon. As many of you reading this know SPA3 is a medium term active investment strategy but Peter’s Super Report requires my technical view with a longer term outlook.

I hope you enjoy this educational piece.

Suncorp Group (ASX: SUN) is a $16.5 billion Top 50 ASX listed company that provides banking, insurance, superannuation and funds management products and services to the retail, corporate and commercial sectors.

During the 2008 bear market Suncorp’s share price suffered far more than the major banks and the two other regional banks when it was down by 78% compared to the others ranging between 60% and 68%. But since the bottom of the 2008 bear market in March 2009 only one of the six other banks in Australia has outperformed SUN and that is CBA.

Flag Pattern at the half way mark

The weekly chart below dates back to early 2007 when SUN reached its all-time high. It is important to show this period to provide perspective of where Suncorp’s share price currently is relative to the decline that it suffered during the 2008 bear market.

The main area on the chart that I am interested in right now is the middle blue line which is the 50% retracement level, or half way mark, of the decline in 2008. Technically a 50% retracement is a key support and resistance area for price action. It took Suncorp’s share price four years from March 2009 to reach this level in April 2013 and has spent nearly a year oscillating above and below this $12.50 area.

Combine this situation with another technical pattern, the flag, and a fairly high probability opportunity may be presenting itself. The flag can be seen at the middle right side of the chart and is depicted by the two red declining parallel lines. A flag is a continuation pattern this putting the odds in favour of a price rise if Suncorp’s share price breaks out above the upper declining trend line.

The breakout out of the flag pattern occurred on 21 March and Suncorp is still trading above the declining trend line.

From here Suncorp could continue to rise to challenge its recent high of $13.67 reached on 25 November. But before that occurs one should expect a short-term retracement to retest the 50% retracement zone at around $12.50 and to meet the declining upper trend line.

If SUN is set to rise then support should be found at the levels mentioned above and from there Suncorp’s price should rise above its recent high and onto its first target around the $14.40 area, which is the 61.8% retracement zone, the upper blue line on the chart.

On the downside, one’s risk should always be managed and the downside protected. A stop loss must always be placed to limit loss in the event that an unforeseen event occurs that affects price negatively. A prudent place to set a stop loss would be just below the recent low of $12.24 on 26 February. A wider stop could be set below the previous low of $11.82 reached on 5 February to allow a trend to develop.